Jobs seems to believe that Apple shouldn’t fragment their product line any further. He seems to think that 3.5" (pocketable) and 10" (more stationary and more capable) are sort of local optima and that Apple should stick to those.
Edit: I've always thought that was the biggest problem with a 7" Apple device: either you have to scale 3.5" iPhone apps up or 9.7" iPad apps down. Neither of which is optimal. And I don't believe you're gonna be able to (or even that you want to) get devs to adapt their existing apps for a third "sub-platform".